US Dollar retreats as Powell speech is nonevent

  • The Greenback erases intraday gains and sees its recovery attempt stalling.
  • Traders will be looking for clues and guidance from Fed Chairman Powell.
  • The US Dollar Index is still in the 105-region, with still more room to the upside to recover from last week's decline. 

The US Dollar (USD) sees its recovery stalling as US Federal Reserve Chairman Jerome Powell delivered speech which held no comments on any monetary policy or guidance. As the earning season is coming to an end, traders are now starting to draw a global picture of the US, and ergo, the world’s economy. With several big names disappointing and recently the bigger retailer discounters showing rising profits, it reveals that the current elevated rate environment is eating into people’s wallets and the US is at bigger risk than ever of falling into a recession together with the rest of the world. 

On the economic data front, traders will set their hopes to the upcoming Fed members due to speak later this Wednesday. They could paint a clearer picture of the concerns the Fed has at the moment and if a recession is part of that. On the data front all important has already been done and dusted.

Daily digest: US Dollar back to square one for this Wednesday

  • The weekly Mortgage Applications index was released by the Mortgage Bankers Association (MBA). The previous print for the index was -2.1%, and was last week back up by 2.5%.
  • US Federal Reserve Chairman Jerome Powell did not comment on the markets or monetary policy.
  • The US Wholesale Inventories came out at 0.2%, while the previous number was at 0%.
  • The US Treasury will try to allocate a 10-year note in the markets near 18:00 GMT.
  • Two Fed speakers are expected at the end of the US session with John Williams from the New York Fed at 18:40 GMT and Philip Jefferson from the Board of Governors of the Fed at 21:45 GMT. 
  • Asian equities are yet again in the red, though less severe. Europe and the US are mildly in the green. The despressed mood is the result of better than expected earnings from the top three US retail discounters in the US, which means that US consumers are looking for cheap alternatives instead of paying full price for goods and services. 
  • The CME Group’s FedWatch Tool shows that markets are pricing in a 90.4% chance that the Federal Reserve will keep interest rates unchanged at its meeting in December. 
  • The benchmark 10-year US Treasury yield trades at 4.55%, finding some calmer ground after last week’s volatility. 

US Dollar Index technical analysis: US Dollar hangs on the lips of Fed members

The US Dollar is back to where it was for this Wednesday after earlier gaining on the back of some safe haven inflow from investors that were asking whether the world is heading – or is already – in a recession. The element that underpins this thesis comes as US earnings this week revealed that retail discounters have seen increased productivity and earnings in their recent quarter. The US consumer is feeling the pain of elevated rates, which means soon something will snap in the economy. 

The DXY was looking for support near 105.00, and has been able to bounce ahead of it. Any shock events in global markets could spark a sudden turnaround and favour safe-haven flows into the US Dollar. A rebound first to 105.85 would make sense, a pivotal level from March 2023. A break above could mean a revisit to near 107.00 and recent peaks printed there.

On the downside, 105.10 is still acting as a line in the sand. Once the DXY slides back below that, a big air pocket is opening up with only 104.00 as the first big level where the 100-day Simple Moving Average (SMA) can bring some support. Just beneath that, near 103.50, the 200-day SMA should provide similar underpinning. 

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

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